Delve into the intricate world of M&A with our latest blog post, ‘Enforcing Earn Outs in M&A Deals: Lessons from the Garden Meadow Case.’ Unravel the complexities surrounding earn-out agreements, as we dissect the cautionary tale of Sandy, the visionary founder facing unexpected challenges in the acquisition of her decorative garden sculptures business. Learn the importance of diligence in crafting and enforcing earn-out provisions, exploring insights crucial for entrepreneurs, business owners, CFOs, CEOs, and M&A professionals. Navigate the nuances of acquisitions for fair treatment and success in the ever-evolving landscape of mergers and acquisitions.
M&A Stories
June 22, 2018
In the world of mergers and acquisitions, the promise of an earn-out can add complexity to the deal-making process. A prime example is the case of Sandy, the visionary founder of a company specializing in decorative garden sculptures illuminated by solar units, marketed under the Garden Meadow brand.
Sandy’s entrepreneurial journey took an unexpected turn when another company, specializing in importing and distributing home décor, seasonal, and gift products, sought to acquire her business. The transaction unfolded through an asset purchase agreement, with the buyer committing to pay Sandy an earn-out based on specific criteria.
The earn-out terms were clear: Sandy would receive 15% of the buyer’s gross profits from Garden Meadow products sold between July 14, 2014, and July 16, 2016. Additionally, she was entitled to 12.5 to 15% of the buyer’s net sales from July 16, 2016, to July 16, 2017. To ensure transparency, the acquisition documents mandated the buyer to provide comprehensive data and documentation supporting their profit and sales calculations.
Despite these safeguards, Sandy encountered setbacks. The buyer failed to deliver the full earn-out amount, and crucially, Sandy did not receive an accurate account of the sales, as stipulated in the acquisition documents. The discrepancies were glaring – the buyer omitted sales of Garden Meadow products under their separate product line, excluded revenue from Garden Meadow sales in their reports, and artificially inflated customer returns.
In response to these breaches, Sandy took legal action, filing a lawsuit against the buyer in a Kansas federal court. This case serves as a cautionary tale for those navigating earn-out agreements in M&A deals.
Commentary:
Earn-outs, a common tool in negotiations where buyer and seller can’t agree on a purchase price, can be a double-edged sword. While they offer flexibility, as seen in the Garden Meadow case, there’s a risk of not receiving the full earn-out. In this instance, it appears the buyer engaged in deceptive practices. In other scenarios, it may stem from a lack of effort on the buyer’s part to fulfill the conditions necessary to trigger the earn-out.
This case underscores the importance of diligence in crafting and enforcing earn-out provisions. For entrepreneurs, business owners, CFOs, CEOs, and professionals across the M&A landscape, learning from such cases is crucial to navigating the complexities of acquisitions and ensuring fair treatment in the pursuit of business growth and success.
Case Reference:
This case is referred to as Cooper Marketing Consulting LLC v. The Gerson Company, Case No. 17-2347-DDC-GLR, United States District Court, D. Kansas (January 3, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
Recent Comments